Month: January 2013

As of January 1, 2013, the Senate and the House have voted on a last-minute budget deal worked out between President Barack Obama and congressional Republicans averting the so-called fiscal cliff.

Details of the deal were sketchy at press time, but here are some highlights of the compromise bill as provided by unofficial sources:

The current tax rates will be kept in place for individuals making less than $400,000. Incomes above $400,000 ($450,000 for married taxpayers, $425,000 for heads of household) will be taxed at 39.6%.

Capital gains rates will be raised from 15% to 20% for taxpayers in the 39.6% bracket.

Qualified dividends will continue to be taxed at capital gains rates.

The estate tax rate will rise to 40% (up from 35%) with an exemption of $5 million.

A one-year extension of unemployment benefits will be provided.

There will be a two-month delay on the automatic spending cuts.

Tax credits established under President Obama’s economic recovery program will be extended for 5 years.

The American Opportunity Tax Credit (tuition credit) will be extended for 5 years.

The alternative minimum tax (AMT) will be made permanent with the exemption being inflation-adjusted in future years.

Itemized deductions and personal exemptions for households will be phased out for those making more than certain amounts.

A host of individual provisions will be extended, including the treatment of mortgage insurance premiums as qualified residence interest, deductions for state and local general sales taxes, and the above-the-line deduction for qualified tuition and related expenses.

Key business tax breaks will be extended such as depreciation provisions, including bonus depreciation, and the research and work opportunity tax credits.

To help you celebrate the New Year, the Federal Government has added a new Medicare surtax on unearned income.

Going by the lofty name, the Unearned Income Medicare Contribution Tax, the new tax is imposed on the unearned income of individuals, estates, and trusts.

For individuals, the surtax is 3.8% of the lesser of:

1. The taxpayer’s net investment income or

2. The excess of modified adjusted gross income over the threshold amount ($250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others).

“Net” investment income is investment income reduced by allowable investment expenses. Investment income includes income from interest, dividends, annuities, royalties, rents (other than those derived from a trade or business), capital gains (other than those derived from a trade or business), trade or business income that is a passive activity with respect to the taxpayer, and trade or business income with respect to the trading of financial instruments or commodities.

For surtax purposes, modified adjusted gross income does not include excluded items, such as interest on tax-exempt bonds, veterans’ benefits, and excluded gains from the sale of a principal residence.

In order to avoid or minimize this new tax, higher income taxpayers may wish to alter their investment portfolios to include more of the non-taxable investments mentioned above.

Homeowners should be aware that the gain from the sale of their primary home in excess of the homeowner’s gain exclusion or gain from selling a second home is treated as investment income and would be subject to this new tax.